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~ “The best macroeconomic policy is a good microeconomic policy. There is no substitute for a more open and competitive environment. If combinations dominate markets throughout the economy and the government is always intervening on behalf of special interests, there is no macroeconomic policy that can put things right.” ~ Mancur Olson, 1982.
~ “Japan needs an economy in which newcomers can edge out moribund firms, in which workers can move easily from job to job, and in which a solid safety net helps the unemployed through that transition. If reforms to create such an environment were put in place, now-lagging sectors would be propelled to world benchmark levels of efficiency, and productivity-led growth would soar.” ~ Richard Katz, 2014.
~ “Hand-in-hand with increased rates of unemployment and part-time employment among young Japanese men has come increasing economic inequality and the specter of a rigidifying social class structure in the new generation.” ~ Mary C. Brinton, 2010
~~ “In Kyoto, the historical-institutional confluence (or serendipity) of cultural eminence, precision technology, pocket-money finance, and political (and social) freedom created a particular socio-cultural milieu. This milieu has produced (and attracted) world-class firms and the entrepreneurs at their helm: Horiha’s Masao Horiha, Kyocera’s Kazuo Inamori, Murata’s Akira Murata, Omron’s Kazuma Tateisi, and Rohm’s Ken Sato.“ ~ Kathryn Ibata-Arens, 2009.
~ “A decline in overall labor demand largely resulted in reduced employment opportunities for youth, while the employment of middle-aged and older workers was relatively safeguarded. A large part of the contraction in the labor demand for younger workers has been due to job displacement by a graying workforce, especially within large firms.” ~ Yuji Genda, 2003
~ “A crucial impediment to addressing these issues is that youth are underrepresented in positions of power. Japan’s decision-makers — who are generally older — tend to be concerned more with issues affecting older voters: the voting rate of those aged 65–69 is almost double that of those in their 20s.” – Noritoshi Furuichi 2014
~ “Japan’s under-40s appear to be losing interest in conventional relationships. Millions aren’t even dating, and increasing numbers can’t be bothered with sex. For their government, “celibacy syndrome” is part of a looming national catastrophe. Japan already has one of the world’s lowest birth rates. Its population of 126 million, which has been shrinking for the past decade, is projected to plunge a further one-third by 2060.” ~ Abigail Haworth, 2013.
Last week Japan’s prime minister, Shinzo Abe, suddenly called for advanced general elections to be held this December. Like me, you may be wondering what brought about this sharp change. For, until recently, Abe appeared to be on a roll. His “three arrows” major reform program launched in 2012 was proceeding steadily, if with some setbacks. But, the election announcement came hard on the heels of news that Japan’s economy had slipped back into recession in 2014, after achieving in 2013 the strongest period of sustained growth and rising inflation in over a decade, dashing hopes Japan was finally in recovery.
It also came despite the central bank – the Bank of Japan (BoJ) governor Kuroda’s surprise early November announcement of a massive expansion in Japan’s money creation (through so-called quantitative easing, QE). In this, Kuroda’s goal is to create increased inflation to help pull Japan out of the deflationary trap that has kept it mired in economic stagnation since Japan’s spectacular financial markets crash in the early 1990s. Since then, Japan has experienced great changes in its economy and society. Prolonged low growth, structural rigidities and an aging society have all compounded to reduce productivity below that of other advanced nations, including the USA. Japan’s large conglomerate dominated, centralized corporate and government systems have been a drag on necessary structural changes. Meanwhile, sweeping world market changes with globalization have radically transformed Japan’s competitive position and with it the confidence and prosperity felt by average Japanese, most particularly Japan’s youth and segments of its fast growing elderly population.
Nevertheless, Japan remains the world’s second largest economy and Japanese incomes are, on average, among the highest in the world – above those of Germany, France, the UK. Huge foreign exchange reserves, accumulated during Japan’s golden age of rapid expansion in the 1970s and 1980s, kept the Yen strong, until its one third depreciation in the past year. In the deepening prolonged malaise of its by now more than two “lost decades”, Japan has become a very wealthy nation sinking ever so slowly into prolonged, seemingly ineluctable decline. Abe’s “three arrows” – monetary expansion (to boost prices), fiscal stimulus (to spark economic expansion) and structural reforms (to restore productivity and international competitiveness) – are aimed at arresting that and restoring Japan as a healthy growing economy within a few years.
Key Questions : So, after its initial apparent success, why has Abe’s program run into trouble? How have his “three arrows” fared so far in turning Japan around? What are the major challenges facing Japan today in its quest for new vibrancy, prosperity and national purpose? In particular, what are the structural reforms needed and how far does Abe’s “third arrow” address these?
The First Two Arrows : During 2013, Abe’s government embarked upon a major fiscal stimulus, increasing the government deficit. Combined with monetary expansion and near zero interest rates implemented by the BoJ, this contributed to higher economic growth (2% in 2013). With lags, it depreciated the Yen and raised prices by 2.5% reversing the trend of the past decade. With that, in 2014, exports have grown substantially. But, then, faced with the perceived risk of Japan’s massive domestic government debt (over 200% of its national income), Abe’s government hesitated and drew back. In April it implemented the first major increase in sales tax (5% to 8%) for seventeen years. Ostensibly, this was to finance rapidly rising social welfare costs of an aging population.
In doing so, Abe made the same mistake of earlier Japanese government attempts at recovery. By acting conservatively, raising taxes too quickly, it exposed the weakness of consumer demand, which has slumped since April – already hit by higher prices due to the Yen depreciation and rising domestic prices. Recent wage rises – mainly in large corporations – were insufficient to offset these and have left the average middle and lower income Japanese worse off than before. Abe has now backed off a planned second sales tax increase (up to 10%) planned for 2016. Hopes are now pinned on the renewed BoJ monetary expansion. But, while this has boosted stock market values and corporate profits – again mainly for Japan’s large corporations – it is not clear how this will help by now beleaguered Japanese consumers.
The Third Arrow – Structural Reform : In June, 2014, the Abe administration launched its revamped Japan Revitalization Strategy. This proposes a wide range of policy and regulatory actions aimed ostensibly at revitalizing the business environment and raising the investment, innovation and productivity levels of Japanese corporations. These measures include such things as reduced business regulations, increased trade liberalization under the Trans-Pacific Partnership (TPP) with ASEAN including the USA, opening up immigration to address population decline, a reduced corporate tax rate to encourage private Japan’s private businesses to invest using their huge cumulated private savings, creation of economic development zones (“tekku”) in six regions to experiment with major structural reforms. Unfortunately, none of these reforms have been spelled out in sufficient detail. Moreover, some have already been rejected by the Diet, Japan’s parliament – most notably an initially modest increase in immigration. Meanwhile, others are inadequate to make much difference : the proposed corporate income tax reduction would be only marginal (39% to 29%) and ineffective since most large corporations already pay much lower rates. So, in many respects, the structural reforms proposed appear repetitions of similar earlier attempts at reform that stalled.
Urgent Need for Real Change : As American economist, Mancur Olson noted in the 1980s, micro-economic – or firm-level – openness and competitiveness are crucial to ensuring a nation’s overall – macro-economic – strength, by preventing corporatism – dominance of a few major corporations. While Japan’s business economy has undergone substantial changes since 1990, loosening past corporate structures, national networks of inter-connected businesses linked to Japan’s major business conglomerates (“keiretsu”) still largely dominate most major sectors. These have been able to adjust by offshoring manufacturing to China and other lower cost S.E. Asian locations to maintain profits, as they have squeezed cost reductions out of captive smaller domestic suppliers. In some export-oriented sectors where Japan is a world leader, such as automobiles and electronics, large corporations (such as Sony, Toyota, Nissan) still are competitive, even though they are less innovative than before.
But there are many highly protected domestic market-based sectors – agriculture, distribution, insurance – where dominance of large national firms and anti-competitive regulation keep prices high, maintain inefficiency, and limit innovation, growth and employment. Yet, Japan does have modern success stories of independent, non-‘keiretsu’ linked businesses that have thrived and built strong new markets through innovation. As Kathryn Ibata-Arens notes, Kyoto has been a major center where such innovation has flourished through such firms as Kyocera and Omron among others. Yet these are, as yet, exceptions not the rule.
Youth in Crisis :Despite Japan’s urgent need to increase its fertility rate to avoid depopulation threatening to reduce its population by one third to a mere 87 million by 2060, Japan’s youth has been the most deeply adversely affected by Japan’s economic stagnation. In the same way that business sectors have been only very partially opened up from ‘keiretsu’ network dominance since 1990, but have gone through changes that have often squeezed small business, employment has only in a limited way broken away from network links between high schools and universities and big business, as sociologist Mary Brinton notes.
In the 1990s, as Japanese economist Yuji Genda has shown, Japan’s big corporations downsized by protecting mid-career employees’ life-time employment jobs, but greatly reducing hiring youth. The result has been a massive increase in unemployment, part-time employment and withdrawal from the labor force of Japanese youth aged 15-24. Job insecurity, far lower wages in part-time and casual employment, have had a dramatic impact upon the lives and perceived life prospects of Japan’s youth – now seen as a “lost generation”. Inability to find full-time work, for many – especially less skilled and less qualified – youth, has left them still living at home into their late twenties and putting off starting a family. Paradoxically, most Japanese youth say they are happy with life today, but more than ever have deep uncertainties about their long-term future. Altogether this has led many to avoid intimacy and relationships contributing the “celibacy syndrome” noted by Abigail Howarth. Japanese youth’s perception of powerlessness is exacerbated by their very low representation in Japan’s political leadership – especially at top levels – which tends to favor older generations and big business. Meanwhile, the breakdown of old networks that gave job security and growing skills-gaps between college educated and high-school educated youth risk hardening into much expanded inequality in Japan’s traditionally more egalitarian society.
Conclusions : Japan is caught in a process of structural transformation in its economy and its society that is proceeding far too slowly and incompletely. This is being driven by a now older generation of Japanese leaders who still think in terms of the institutions, structures and policies that gave Japan great success thirty to forty years ago. Even as those arrangements have proven no longer adequate for continued dynamism and prosperity for the broad mass of Japanese, they have been reluctant to step up the pace of change. Ultimately, for Abe’s “three arrows” to succeed, his administration must show the boldness and political ability to follow through and implement both the first two, but especially the third arrow or structural reform. And he will need to do it in a way that gives hope and confidence to Japan’s youth. While the jury is still out, on the progress to date, the prospects for a successful transition now look bleaker than two years ago.
Japan is still the world’s third largest economy and a major player in world markets. I, for one, hope that its leaders fully take up the challenges of transformation now and succeed!